Understanding RED II – What is the CO2 emissions impact of the rules defining hydrogen as “green”?

Understanding RED II – What is the CO2 emissions impact of the rules defining hydrogen as “green”?

The European Commission is currently drafting a Delegated Act to implement the Renewable Energy Directive II (RED II).

Along with wider regulatory reform, it specifies sustainability criteria for purchasing electricity originating from green hydrogen. In June 2021, Frontier Economics conducted and published a short study on the topic of ‘Sustainability Criteria of RED II - effects on costs and availability of green hydrogen’ on behalf of RWE AG.

Our research shows that the costs of green hydrogen production fall sharply if the time periods, in which  renewable energy (RES-E) procurement and electrolysis for producing hydrogen have to be balanced (“balancing periods”), are extended. In the discussion, however, the thesis is repeatedly expressed that a pragmatic and rather broad interpretation of the sustainability criteria would lead to a noticeable increase in CO2 emissions in the electricity system.

Against this background, Frontier Economics was recently commissioned by RWE AG to research the emissions impact of green hydrogen production subject to different interpretations of the EU’s RED II sustainability criteria.

Using power market modelling, we show that the impact of green H2 production on emissions is very limited, even under the assumption of very high utilisations of electrolysers. In some scenarios, our analysis even reveals that moving from hourly correlation between RES-E production and H2 electrolysis to a yearly balancing of volumes can yield emission savings.

CO2 intensity in relation to the energy quantity of one kilogram of hydrogen (H2 equivalent).

SMR: Steam methane reforming; AMR: autothermal reforming; CCS: carbon capture and storage; the blue area shows the range of values.

We attribute these effects to the following principles:

Additionality of renewable electricity production for the production of green hydrogen is also given in the case of longer balancing periods. This is determined by the requirements for RES-E plants from which electricity for the production of green hydrogen can be obtained. It is prescribed in the rulings that the number of kilowatt hours used by electrolysers corresponds to the number of kilowatt hours produced by additional renewable installations: Therefore, for additionality of renewable power production, the length of the balancing period is therefore irrelevant.   

Hydrogen production follows renewable production even without rigid regulations.  In the case considered here, both electricity procurement and hydrogen production are grid-bound; the opportunity costs for electricity production and electricity consumption result from the wholesale electricity market.

Therefore, the electrolysers will sell the contracted renewable electricity on the wholesale market when electricity prices are high and will consume it themselves when electricity prices are low. This means, no tight specification on temporal correlation (or time) is required to bring about a correlation between renewable electricity production (when electricity production is high, wholesale prices tend to be low) and hydrogen production (when electricity prices are low, hydrogen production is attractive).

Expanding the balancing between RES-E feed-in and hydrogen production thus enables market-oriented dispatch of electricity usage, which brings about a correlation between RES-E feed-in and electrolysis.

System efficiency of hydrogen production is improved by market-oriented operation. Furthermore, a market-oriented operation of the electrolysers supports the system efficiency more strongly with less rigid temporal correlation than with strict specifications.

Therefore, under exacting specifications, hydrogen production follows the feed-in profile of the investor's RES-E plant portfolio or contracted plants. In practice, however, this portfolio will not correspond to the RES-E plant portfolio of the entire power system.

With a close temporal correlation of H2 generation, the deployment of electrolysis will follow the feed-in profile of the investor's own RES-E plant portfolio, even if this is not optimal from a system perspective and vice versa. The system integration of renewables is therefore weakened, not strengthened.

The German government sees hydrogen as a focal point of climate policy. The present coalition’s agreement, formed between the SPD, Green Party, and the FDP, sets the goal of making Germany the ‘lead market’ for hydrogen technology by 2030. 

A regulatory approach would be appropriate which ensures that hydrogen production meets the sustainability criteria from RED II. At the same time, it should not create excessive barriers to ramping-up the green hydrogen economy. The production and usage of green hydrogen in the industry and other energy consuming sectors will be key for the transition of the energy system towards carbon neutrality. Sustainability criteria for green hydrogen should therefore be defined with judgement and care.

You can read the full study, in German, here